I’m a Financial Expert: 7 Times It’s OK To Dip Into Your Retirement Funds
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Angela Mae
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Levi Leidy
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Most financial experts would advise against withdrawing from your retirement funds, but there are a few exceptions. While you should always weigh your options and consider the pros and cons before dipping into your accounts, doing so at certain times could be more beneficial than ignoring them as a potential financial resource.
But what are those times, and what should you consider before dipping into your retirement savings?
GOBankingRates spoke with financial experts Erika Kullberg and True Tamplin to get their take. Here’s what they said.
You’re Facing Significant Healthcare Expenses
“Ideally, you want to avoid ever touching your retirement funds before you retire, but there are times when it can make sense to lean on that money,” said Erika Kullberg, an attorney, personal finance expert and founder of Erika.com.
One of those times is when you’re facing a medical emergency and wouldn’t otherwise have the money to pay the bill.
“Health always comes first. If the only way you can pay for a life-changing or possibly life-saving surgery or medical care for you, your spouse or your children is by dipping into retirement funds early, do it,” said Kullberg.
You Have a Qualifying Disability
“If you’re unable to work due to a severe physical or mental condition, dipping into your retirement funds can be necessary,” said True Tamplin, a certified educator in personal finance and founder of Finance Strategists.
But keep in mind that you’ll need to prove that you have a disability, or else you could face an early withdrawal penalty from your IRA or 401(k).
“The IRS requires proof of disability, such as a physician’s determination that your condition is expected to be long-lasting or result in death,” said Tamplin.
You Need To Pay Off Debt
If you have a little debt, or if the payments are manageable, it might not be wise to pull from your retirement savings. But if you have crippling debts and can’t seem to get ahead of them, your retirement funds could help.
“If you are struggling under the weight of your debt and are risking foreclosures, bankruptcy and other very serious consequences, talk to a financial advisor about whether it makes sense to use retirement savings to pay off that debt and give you a fresh start,” suggested Kullberg.
You’re Financing a New Business
“Using retirement funds to finance a startup or small business can be a gamble that pays off for some,” said Tamplin. “It involves rolling over your retirement savings into a corporate retirement account that invests in your business, a process that requires careful legal and financial planning.”
But if you’re prepared for this, and you understand all of the possible pros and cons, using your retirement funds could prove helpful.
You’ve Decided To Pursue Higher Education
“If you are confident pursuing a new degree or certification will help you make more money in the long run, number-wise it may make sense to use retirement savings to pay for your education expenses so you have a leg up in the working world,” said Kullberg.
You might want to do this only if you’re still relatively early in your career, though. Be sure to make a plan for how you’re going to use your new degree or certificate to earn more money. You may also want to run some numbers to ensure your new earning potential is high enough to offset any losses.
Your Home Is On the Line
Owning a home can be expensive, especially if you’re still making mortgage payments. If property taxes or insurance premiums rise beyond your budget, you might need to turn to your retirement accounts.
“Job loss and other financial disasters can make it hard to keep up with mortgage payments,” said Kullberg. “If the only way to save your home is to borrow money from your retirement savings, that might be the right call to make.”
“Using retirement savings to prevent the foreclosure of your primary residence can be a necessary last resort,” Tamplin added. But be aware that there will likely be penalties and taxes from withdrawing from your accounts. If keeping your home outweighs the cost, it might be the right decision for you.
You’re Dealing With Divorce
More often than not, divorce is expense. More than that, it has an impact on your retirement funds.
“Divorce can lead to a court-ordered division of your retirement funds with your former spouse or dependents,” said Tamplin. “This distribution, known as a qualifying domestic relations order, is penalty-free, but it’s crucial to understand the tax implications.”
Speak with a qualified attorney or tax professional about these tax implications, and what you can do to offset or minimize them and protect your finances.
What To Do When You’ve Dipped Into Your Retirement Funds
If you’ve decided you need to use some or all of your retirement savings for one of these reasons, or for something else, it’s crucial that you start building it up again as soon as possible. Here are a few ways to do just that.
Start Maximizing Your Contributions
“If you need to play catch-up after taking money out of your retirement savings, you need to be aggressive,” said Kullberg. “Commit to maxing out your employer-sponsored 401(k) and an IRA. That way, you can make as much money as possible off your employer’s match and can save as much on taxes as possible, whether that be now or during retirement.”
Any tax breaks you might get from contributing to your retirement accounts can also help you stretch your savings.
Cut Back on Spending
“If you need to use some of your retirement savings early, replenish those funds to avoid financial shortfalls later,” said Tamplin. “Reduce your spending and redirect those funds into your retirement savings to help recover the balance over time.”
And when your financial situation stabilizes, put any extra cash toward your retirement savings, too.
Take On Extra Work
Taking on a side gig or extra hours at your regular job can also help.
“Consider taking up a part-time job or another income source,” said Tamplin. “This extra money can be directed toward your retirement savings, helping to refill it quicker.”
Delay Retirement
It might not be ideal, but if you simply don’t have the money in your accounts, you might need to put off retirement for a few years.
“If it’s an option, delaying retirement can afford your savings additional time to rebound and grow from the premature withdrawal,” said Tamplin.
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